Fourth Quarter & FY 2017 Earnings Conference Calls21.q4cdn.com/968466851/files/doc_presentations/2018/03/CPI-Q41… · • Expect U.S. industry card manufacturing volume will be about

Copyright 2018 CPI Card Group

Fourth Quarter & FY 2017 Earnings Conference CallMarch 12, 2018


Safe HarborForward-Looking Statements

• Statements in this presentation that are not statements of historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation

Reform Act of 1995. These forward looking statements may be identified by terms such as statements about our plans, objectives, expectations, assumptions or

future events. Words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “cont inue,” “project,” “plan,” “foresee,” and other

similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties

that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, but are not limited to: system

security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our IT systems; defects in our software; failure to identify and

attract new customers or to retain our existing customers; problems in production quality and process; failure to meet our customers’ demands in a timely manner; a

loss of market share or a decline in profitability resulting from competition; developing technologies that make our existing technology solutions and products less

relevant or a failure to introduce new products and services in a timely manner; disruptions relating to the development and execution of our strategy, or a failure to

realize the anticipated benefits of such strategy; our inability to sell, exit, reconfigure or consolidate businesses or faci lities that no longer meet with our strategy; our

inability to develop, introduce and commercialize new products; our substantial indebtedness, including inability to make debt service payments or refinance such

indebtedness; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; our limited ability to raise capital in the future;

our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement; our dependence on the timely supply of

materials, products and specialized equipment from third-party suppliers; a competitive disadvantage resulting from chip operating systems developed by our

competitors; price erosion in the financial payment card industry; failure to accurately predict demand for our products and services; quarterly variation in our

operating results; the effect of legal and regulatory proceedings; infringement of our intellectual property rights, or claims that our technology is infringing on third-

party intellectual property; our inability to realize the full value of our long-lived assets; the impact of U.S. tax reform legislation; our failure to operate our business in

accordance with data privacy laws, the PCI Security Standards Council (“PCI”) security standards or other industry standards such as Payment Card Brand

certification standards; costs relating to product defects; a decline in U.S. and global market and economic conditions; potential imposition of tariffs and/or trade

restrictions on goods imported into the United States; economic conditions and regulatory changes leading up to and following the United Kingdom’s exit from the

European Union; our dependence on licensing arrangements; inability to renew leases for our facilities; dependence on our senior leadership team; inability to

recruit, retain and develop qualified personnel; the continued viability of the Payment Card Brands; non-compliance with, and changes in, laws in the United States

and in foreign jurisdictions in which we operate and sell our products; failure to maintain our listing on the NASDAQ; and other risks and other risk factors or

uncertainties identified from time to time in our filings with the Securities and Exchange Commission. Although the Company believes that the expectations reflected

in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more

complete discussion of forward-looking statements and applicable risks contained under the captions “Cautionary Statement Regard ing Forward-Looking

Information” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, 2017 and in

the Company’s forthcoming Annual Report on Form 10-K for the year ended December 31, 2017. CPI Card Group Inc. undertakes no obligation to update or revise

any of its forward-looking statements, whether as a result of new information, future events or otherwise.


Business Summary

Scott Scheirman

President and CEO


• Total net sales of $254.9 million

• GAAP net loss of $22.0 million, Adjusted

net loss* of $2.2 million

• Adjusted EBITDA* of $25.5 million

• Cash flow from operating activities of

$2.4 million

4

Results Summary

FY 2017

* See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.

** See slides 12 and 14 to this presentation for a reconciliation of Cash provided by operating activities to Free cash flow.

Q4 2017

• Total net sales of $65.0 million

• GAAP net loss of $14.6 million, Adjusted

net loss* of $400 thousand

• Adjusted EBITDA* of $3.4 million

• Cash flow from operating activities of

$9.4 million and Free Cash Flow ** of

$8.4 million


Business Review

5

Overview

• CPI has developed a strategy & plan that will enable it to

better serve the needs of our customers, further capitalize

on our addressable market, and deliver shareholder value

• Goal is to be the partner of choice by providing market-

leading quality products and service with a cost competitive

business model

• CPI will focus on four key strategic priorities that will enable

us to reach our objectives and get CPI “fit for growth”

1. Deep customer focus

2. Market-leading quality products and customer service

3. Market competitive business model

4. Continuous innovation


Business Review

6

U.S. Organizational Re-alignment

• CPI has re-aligned its U.S. business by product to

best address its strategy

• Organizational re-alignment is focused on

enhancing product and service delivery, driving

faster decision-making, and improving

accountability and speed to market.

New business units are:

• Secure Card Solutions, which

includes CPI Metals

• Personalization Solutions,

including CPI On-Demand

• Card@Once®

• Prepaid

Each business unit is led by a General Manager with

full P&L responsibility.


Market-leading quality products and

customer service

Deep customer focus

7

Ensure the customer is at the center of all that we do

• Platforms and solutions are being leveraged and enhanced

to create choice, convenience and control for our customers

Business Review

With a high bar for excellence, accountability and

continuous improvement

• Enhanced continuous improvement initiatives

• Emphasis on leadership and accountability and training to ensure

consistency

Improving productivity and reducing costs

While ensuring the highest quality and market-competitiveness

Executing on:

• Process improvements and efficiencies

• Direct and indirect procurement savings

• An optimized footprint

• Consolidating personalization operations from 3 facilities to 2

Ongoing innovation to generate new

opportunities and fuel future growth

• Card@Once®

• CPI Metals™

• CPI On-Demand™

• CPI Digital Solutions™

• Secure packaging and packaging innovation

Four Key Strategic Priorities to Enable CPI to Reach its Objectives


The Market

8

U.S. Market Conditions

• The market for U.S. Debit and Credit card manufacturing remains challenging

• Expect U.S. industry card manufacturing volume will be about flat in 2018 versus 2017 levels

• Expect average selling prices will continue to decline during the course of this year, similar to what CPI experienced in 2017

• Personalization and fulfillment services will be characterized by more modest levels of demand driven by steady-state new card issuance, expiration, and lost/stolen-related card reissuance activity

• Encouraged by early 2018 momentum in Prepaid Business, and expect that CPI will participate in the industry’s modest growth this year


Card @Once®

9

• Ended Q4 with ~7,400 installations, up from ~6,700 at the end of Q3 and ~5,600 at YE 2016

• Continue to see good demand from small and medium-sized banks who are seeking differentiation

Business Highlights

CPI Metals™ CPI On-Demand™ Dual Interface EMV

Emerging Products & Solution Areas

• Began shipping first metal cards in October

• Encouraged by the level of activity we are seeing in early 2018

• Revenue growth continues to progress and encouraged by the momentum

• Added new business wins in the healthcare and transportation sectors

• In active conversations with customers regarding their dual interface product roadmaps

• At this time not factoring dual interface into 2018 plans in a meaningful way


Summary

10

• 2017 was a challenging year

• Believe there is significant long-term opportunity for CPI

• Have put a strategy and plan in place that will get CPI “fit for growth”

• Look forward to sharing our progress with customers, analysts, and investors


Financial SummaryLillian Etzkorn

Chief Financial Officer


Financial Results

12

Fourth Quarter and FY 2017


($ in millions, except EPS and ASP)

2017 2016 Change 2017 2016 Change

Net sales:

Products 30.3$ 36.0$ (5.7)$ 125.3$ 168.5$ (43.2)$

Services 34.7 31.4 3.3 129.6 140.2 (10.6)

Total net sales 65.0$ 67.4$ (2.4)$ 254.9$ 308.7$ (53.8)$

Gross Profit 18.6$ 20.4$ (1.8)$ 75.0$ 101.9$ (26.9)$

gross margin 28.7% 30.3% 29.4% 33.0%

(Loss) Income from operations (21.8)$ (0.9)$ (20.9)$ (18.1)$ 29.0$ (47.1)$

Net (Loss) Income (14.6)$ (4.0)$ (10.6)$ (22.0)$ 5.4$ (27.4)$

GAAP Diluted EPS (1.31)$ (0.36)$ (0.95)$ (1.98)$ 0.48$ (2.46)$

Adjusted EBITDA* 3.4$ 8.6$ (5.3)$ 25.5$ 57.2$ (31.7)$

adj. ebitda margin 5.2% 12.8% 10.0% 18.5%

Adjusted Net (Loss) Income* (0.4)$ 0.1$ (0.5)$ (2.2)$ 15.7$ (17.9)$

Adjusted diluted EPS* (0.03)$ 0.01$ (0.04)$ (0.20)$ 1.40$ (1.60)$

Cash provided by operating activities 9.4$ 20.2$ (10.8)$ 2.4$ 60.0$ (57.5)$

Capital Expenditures (1.0)$ (1.9)$ 0.9$ (8.8)$ (14.3)$ 5.5$

Free Cash Flow 8.4$ 18.3$ (9.9)$ (6.4)$ 45.7$ (52.0)$

U.S. Debit and Credit Segment Metrics

EMV Cards Sold 13.7 18.0 (4.3) 70.3 104.5 (34.1)

EMV Average Selling Price (ASP) 0.90$ 0.97$ (0.07)$ 0.86$ 0.95$ (0.09)$

Fourth Quarter Year Ended December 31,


Financial Results

13

Fourth Quarter 2017 Segment Review

U.S. Debit and Credit

U.S. Prepaid Debit

U.K. Limited

Net Sales EBITDA*

$19.0

$6.5$12.6

$3.2

($ in millions)

Q4 2017 Q4 2016

Margin 34.5% 25.5%

Q4 2017 Q4 2016

Margin 0.1% 12.8%

Q4 2017 Q4 2016

Q4 2017 Q4 2016

Q4 2017 Q4 2016


** Segment EBITDA of $(10.9) million excluding non-cash goodwill impairment charge of $17.2 million in the fourth quarter of 2017 was $6.3million.

$7.5

$0.0

$7.8

$1.0

**

Q4 2017 Q4 2016

Margin 16.5% 20.2%

$37.9$6.3

$43.7$8.8


Financial Results

14

Operating and Free Cash Flow

• Positive Operating Cash Flow in Q4 and FY 2017

• Positive Free Cash Flow in Q4 2017

($ in millions)

2017 2016 Change 2017 2016 Change

Net income (14.6)$ (4.0)$ (10.6)$ (22.0)$ 5.4$ (27.4)$

Impairments 19.1 2.7 16.4 19.1 2.7 16.4

Depreciation and amortization 4.4 4.4 0.0 18.0 16.9 1.1

Stock-based compensation expense 0.6 0.8 (0.2) 2.0 3.6 (1.6)

Amortization of debt issuance costs and debt discount 0.5 0.5 0.0 1.9 1.9 0.0

Excess tax benefits from stock-based compensation - (0.1) 0.1 - (0.6) 0.6

Deferred income taxes (8.2) (1.4) (6.8) (9.1) (1.8) (7.3)

Working capital / other, net 7.6 17.3 (9.7) (7.5) 31.9 (39.4)

Cash provided by operating activities 9.4$ 20.2$ (10.8)$ 2.4$ 60.0$ (57.6)$

Capital Expenditures (1.0) (1.9) 0.9 (8.8) (14.3) 5.5

Free Cash Flow 8.4$ 18.3$ (9.9)$ (6.4)$ 45.7$ (52.0)$

Three Months Ended December 31, Twelve Months Ended December 31,


Financial Results

15

Debt and Liquidity

• Term Loan Has No Financial Leverage Covenants

• Borrowing Under Revolver limited to $20 million above 7.0x Net Debt / LTM Adj. EBITDA

(Undrawn)

Revolver$40

Term

Loan$313

2017 2018 2019 2020 2021 2022

CPI Debt Maturities$(Millions)

($ in millions) Year End

2017 2016

Cash $23.2 $37.0

Debt $312.5 $312.5

Net Debt $289.3 $275.5

Weighted Average Interest Rate 6.7% 6.3%

LTM Adj. EBITDA* $25.5 $57.2

Net Debt Leverage Ratio 11.4X 4.8X

Liquidity $43.2 $77.0



Appendix


Non-GAAP Measures

17

Non-GAAP Financial InformationIn addition to financial results reported in accordance with U.S. generally accepted accounting principles (GAAP), we have provided the following non-GAAP financial measures in this presentation: Adjusted Net (Loss) Income, Adjusted Diluted (Loss) Earnings per Share, EBITDA, Adjusted EBITDA, and Free Cash Flow. Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share exclude the impact of impairments, amortization of intangible assets, litigation and related charges incurred in connection with certain patent and shareholder litigation, stock-based compensation expense, performance bonuses in connection with the EFT Source acquisition, restructuring and other charges and other non-operational, non-cash or non-recurring items, net of their income tax impact. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, adjusted for impairments, litigation and related charges incurred in connection with certain patent and shareholder litigation, stock-based compensation expense, performance bonuses in connection with the EFT Source acquisition, restructuring and other charges, foreign currency gain or loss, and other items that are unusual in nature, infrequently occurring or not considered part of our core operations, as set forth in the reconciliation. EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income should not be considered an alternative to net loss, income or loss before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure operating performance, liquidity or the ability to service debt obligations. The Company believes EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income present a transparent view of our recurring operating performance and allow management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. Management also believes these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods. EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income, as CPI defines them, may not be comparable to EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income or similarly titled measures used by other entities. We define Free Cash Flow as cash flow from operations less capital expenditures. We use this metric in analyzing our ability to service and repay our debt and to forecast future periods. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt. Further, management and various investors use the ratio of total debt less cash to Adjusted EBITDA, or “Net Debt Leverage”, as a measure of our financial strength and ability to incur incremental indebtedness when making key investment decisions and evaluating us against peers.

Investors are encouraged to review the reconciliation of these historical non-GAAP measures to their most directly comparable GAAP financial measures included below. Additional information relating to certain financial measures, including our Non-GAAP financial measures, is available in our most recent earnings release and on our website at http://www.cpicardgroup.com/investor-relations.


Non-GAAP

18

Reconciliation

EBITDA and Adjusted EBITDA:

Net (loss) income $ (14.6) $ (4.0) $ (22.0) $ 5.4

Interest expense, net 5.3 4.9 20.8 20.0

Income tax (benefit) expense (12.5) (2.1) (16.4) 3.1

Depreciation and amortization 4.4 4.4 18.0 16.9

EBITDA $ (17.3) $ 3.3 $ 0.5 $ 45.5

Adjustments to EBITDA

Impairments 19.1 2.7 19.1 2.7

Litigation and related charges 1.0 1.0 4.5 3.5

Stock-based compensation expense 0.6 0.8 2.0 3.6

EFT Source acquisition performance bonuses — 0.3 — 1.0

Restructuring and other charges — 0.4 — 0.4

Foreign currency (gain) loss — 0.2 (0.6) 0.4

Subtotal of adjustments to EBITDA 20.7 5.4 25.0 11.7

Adjusted EBITDA $ 3.4 $ 8.6 $ 25.5 $ 57.2

Adjusted net (loss) income and (loss) earnings per share:

Net (loss) income $ (14.6) $ (4.0) $ (22.0) $ 5.4

Impairments 19.1 2.7 19.1 2.7

Amortization of intangible assets 1.2 1.2 4.9 4.6

Litigation and related charges 1.0 1.0 4.5 3.5

Stock-based compensation expense 0.6 0.8 2.0 3.6

EFT Source acquisition performance bonuses — 0.3 — 1.0

Restructuring and other charges — 0.4 — 0.4

Tax effect of above items (7.7) (2.2) (10.7) (5.6)

Adjusted net (loss) income $ (0.4) $ 0.1 $ (2.2) $ 15.7

(in millions)

Three Months Ended December 31,

2017 2016

Twelve Months Ended December 31,

2017 2016

(in millions)


Non-GAAP

19

Reconciliation

(Loss) Income from operations, excluding non-cash impairments

(Loss) Income from operations $ (21.8) $ (0.9) $ (18.1) $ 29.0

Impairments 19.1 — 19.1 -

(Loss) Income from operations, excluding non-cash impairments $ (2.7) $ (0.9) $ 1.0 $ 29.0

U.S. Debit and Credit Segment

EBITDA $ (10.9) $ 8.8 $ 11.5 $ 52.1

Non-cash goodwill impairment charge 17.2 — 17.2 —

EBITDA, excluding non-cash goodwill impairment charge $ 6.3 $ 8.8 $ 28.6 $ 52.1

Weighted-average number of shares outstanding:

Basic 11.1 11.1 11.1 11.2

Effect of dilutive equity awards — 0.1 — 0.1

Weighted-average diluted shares outstanding 11.1 11.1 11.1 11.2

Reconciliation of diluted (loss) earnings per share (GAAP) to

adjusted diluted (loss) earnings per share:

Diluted (loss) earnings per share (GAAP) $ (1.31) $ (0.36) $ (1.98) $ 0.48

Impact of net (loss) income adjustments 1.28 0.37 1.78 0.92

Adjusted diluted (loss) earnings per share $ (0.03) $ 0.01 $ (0.20) $ 1.40



2017 2016


2017 2016

(in millions)


2017 2016

2017 2016



2017 2016


2017 2016

2017 2016

(in millions)


2017 2016

Documents

Fourth Quarter & FY 2017 Earnings Conference Calls21.q4cdn.com/968466851/files/doc_presentations/2018/03/CPI-Q41… · • Expect U.S. industry card manufacturing volume will be about